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Board Members, Executives and Family Members Can Still Benefit

Making Deals with Directors

Corporate governance experts scrutinize management deals with directors to see if those transactions could interfere with a board's responsibility to be an agressive watchdog for shareholders. Glass, Lewis & Co. LLC, which advises institutional investors on corporate governance, generally recommends that they withhold their votes from directors whose firms work for a company, chief executive Gregory P. Taxin said. "Their independence is tainted by virtue of the fact that they are the hired hand of management or seeking to be the hired hand of management," Taxin said.

Other specialists in corporate governance say side relationships between companies and their overseers should be evaluated on a case-by-case basis and, depending on the details, may be harmless or beneficial to shareholders.

TeleCommunications Systems chief executive Maurice B. Tose is developing an office park where his company has agreed to lease space. (James M. Thresher -- The Washington Post)

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When Martek Biosciences was preparing to build a production plant in South Carolina, it awarded Clark Construction Group a no-bid $2 million contract to manage the project. Robert J. Flanagan, a member of the Martek board's nominating and corporate governance committee, is executive vice president of Clark Enterprises Inc., the parent company of Clark Construction.

Flanagan proposed the arrangement to Martek management, said George P. Barker, Martek's general counsel. "He basically said, 'I think we can help you out if we can strike a deal,' " Barker said.

Flanagan recalled it differently. "It was management's idea," he said.

The nominating committee obtained opinions from independent consultants that it was a fair deal, and Flanagan did not participate in the committee's discussions, Martek reported. To avoid delay, the company did not seek competing bids, Barker said.

The contract "has absolutely no impact on his [Flanagan's] independence as a director," Barker said, adding that neither Martek nor Clark feels beholden to the other.

Xybernaut Corp., which sells wearable computers, paid board member James J. Ralabate $926,913 in legal fees from 2000 through 2002, the company said in a report filed last year. During most of that time, Xybernaut was Ralabate's "only significant client," the company reported.

"I don't think there's any conflict there," Xybernaut spokesman Michael Binko said. "I think it really comes down to Jim as a person. His integrity is impeccable."

At USEC Inc., a uranium enrichment company that was once owned by the federal government, board chairman James R. Mellor has a $350,000 per year consulting contract on top of the standard director's compensation -- a $65,000 retainer, which he takes in stock, plus fees for meetings attended, stock options, and $30,000 in restricted stock. When the board's outside directors held meetings with no members of management present, Mellor presided, and he serves on the committee that monitors USEC's compliance with regulations, the company reported.

USEC spokesman Charles Yulish said Mellor's role as consultant to the company "is quite different" from his role as chairman. As chairman, "he oversees the preparations for board meetings, conducts the board meetings and deals with all board related matters," Yulish said. As a consultant, "he's primarily focused on both strategic business, corporate governance and other matters and specifics," Yulish said.

Mellor is not considered independent , Yulish said.

Washington Post Co. director George J. Gillespie III is a partner at Cravath, Swaine & Moore LLP, one of several law firms used by The Post Co. Gillespie advises the family of Chairman and chief executive Donald E. Graham and serves as a trustee of Graham family trusts, said Diana M. Daniels, general counsel of The Post Co.

The company's proxy said that Elizabeth Weymouth, sister of Donald E. Graham, has a $25,000 annual contract to write for The Washington Post and is employed as a senior editor at the company's Newsweek magazine with "base compensation" of $170,000. The proxy did not mention that Weymouth's daughter, Katharine W. Scully, was the newspaper's director of recruitment in 2003. She is now director of advertising sales.

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